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Lower rates still have capacity to support demand: RBA chief

Friday, February 13, 2015 - 07:57

Lower interest rates today may not have the same effect of boosting demand as they once did, but monetary policy isn't at a point yet where it has no effect at all, Australia's central bank chief said on Friday.

PHOTO: BLOOMBERG

[SYDNEY] Lower interest rates today may not have the same effect of boosting demand as they once did, but monetary policy isn't at a point yet where it has no effect at all, Australia's central bank chief said on Friday.

Speaking to lawmakers at his twice-yearly parliamentary testimony, Reserve Bank of Australia (RBA) governor Glenn Stevens said it was with this in mind that the bank decided to cut interest rates last week. "Our judgement is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support," Mr Stevens said. "The Board is also very conscious of the possibility that monetary policy's power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past." The RBA surprised some analysts last week when it reduced its cash rate by a quarter point to a record low 2.25 per cent, resuming an easing cycle that had been on ice since late 2013.

Mr Stevens reminded lawmakers that board members took into account revised outlooks for longer sub-trend growth, a higher peak in the unemployment rate and slightly lower inflation when deciding to ease borrowing costs.

Mr Stevens was quick to add that the central bank was mindful of home prices, which have continued to increase. "Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds," he said. "Excluding Sydney, the rise for Australia as a whole over the past year was about 5 per cent. That is a healthy pace but not alarming, and some cities have seen price falls." Mr Stevens also said the recent steep fall in the Australian dollar was "more or less" expected. He added he could think of reasons for the currency to fall further still, but declined to expand on them.

The Australian dollar barely reacted to Stevens' latest remarks. It last traded at US$0.7749, still holding above a six-year trough of US$0.7627 set earlier in the month.

In its quarterly monetary policy statement released a few days after the rate decision, the RBA warned that overall growth was likely to remain below trend for longer than earlier expected.

The RBA also underscored a string of uncertainties facing the economy, not least the combined effect of the collapse in oil prices and a lower exchange rate on domestic activity and inflation.

Global uncertainties including low oil prices, China's economic outlook and the impact of a massive bond buying scheme from the European Central Bank, have added to pressure on other central banks to take extra steps.

Sweden's central bank was the latest to launch unconventional measures including negative interest rates and bond purchases. The Riksbank said further steps could be taken to battle falling prices.